Media mogul Barry Diller has had discussions in the last month with General Electric Corp. about merging NBC Inc. with his USA Networks Inc. in a stock swap that would be valued at between $15 billion and $20 billion, according to sources close to the talks.
The sources, however, said the discussions abruptly ended because Edgar Bronfman Jr., chief executive of Seagram Co., which owns 45% of USA, refused to go along with the idea. Bronfman objected because the merger would dramatically reduce his stake in USA, and sources say he didn't want to contribute additional assets from Universal Studios to maintain his position in Diller's company.
Neither NBC, Seagram nor Diller would comment. Several media executives say rumblings of such a deal were the buzz of the Allen & Co. media conference last week in Sun Valley, Idaho. One participant said the NBC discussions had strained relations between Diller and Bronfman, who are usually good friends as well as business partners.
The aborted talks suggest that GE may finally be serious about spinning off its television business after toying with the notion for at least a year. They also raise interesting questions about the obstacles Diller faces in achieving his grand vision of building an entertainment empire.
Sources say GE has held exploratory discussions in the last year with several media concerns, including Sony, Viacom and Liberty Media, about possibly merging with NBC after it is spun off into a separate company. But sources said those talks stalled over issues of control.
Jack Welch, the powerful chairman of GE, has been unwilling to relinquish control of the network, sources say. The bleak outlook for the network business and Welch's desire to retire in two years on a high note may be changing his sentiment.
In his 17-year reign, Welch has built GE into one of America's top- performing companies by insisting that each division rank first or second in its business and that their profit consistently grow by 20% a year. Many underperformers have been sold.
Although NBC is still No. 1 in the ratings and more profitable than all its competitors combined, its earnings are expected to slide because of the loss of "Seinfeld" and the NFL; higher costs for professional basketball, "Frasier" "Mad About You" and especially "ER"; and continuing erosion of its audiences by cable and the Internet.
Analysts expect the network's profit to drop in half by next year, to about $270 million. In what many experts see as the beginning of a long-term trend, advertising sales by the four broadcast networks for the fall prime-time season declined this year for the first time this decade, while the top cable networks scored increases.
"NBC is going to become a drag on GE's value," said Christopher Dixon, an analyst at PaineWebber Inc.
Sources say NBC executives have grown frustrated as rivals have moved rapidly to consolidate and merge. While NBC has aggressively expanded in cable, launching CNBC and MSNBC, it and CBS are alone among the six broadcast networks without ties to a major Hollywood studio. NBC executives also worry about being at a disadvantage against less financially disciplined rivals such as News Corp., the owner of the Fox network, which has spent heavily on programming.
"Over the years I've been surprised that NBC didn't make the content acquisitions needed to make entertainment a more significant portion of GE," said David Londoner of Schroder & Co. "But entertainment is a high-risk, low-return business that does not sit well within GE's button-down and earnings-driven culture."
Sources say spinning off NBC is viewed by GE as a way to expand the media business more aggressively without damaging GE's earnings. Some analysts consider Viacom a natural fit because of Paramount Pictures' long-term relationship as a supplier to NBC, and because Viacom's UPN network is the weakest of the six broadcast networks.
Although Welch is still eager to keep a hand in broadcasting, sources say he may want to cut his exposure through a spinoff, which is more tax-efficient than a sale. And one source said Welch may be interested in pursuing a financial acquisition that would complement its GE Capital arm.
Diller has long coveted a network. After building the Fox network for Rupert Murdoch in the late '80s and early '90s, Diller left News Corp. vowing never again to have a boss. He bought a stake in QVC, and with partners Comcast Corp. and John Malone's Liberty Media attempted to take over Paramount Communications, but he was defeated in that bid in 1994 after a long and bitter court feud with rival bidder Viacom chief Sumner Redstone.
When Diller made a run at CBS against Comcast's wishes, he eventually lost that bid and was forced out of QVC. With Malone's help, he later gained control of Home Shopping Network, a group of UHF television stations.
In a complicated $4.1-billion transaction in February, Bronfman sold Diller the TV assets of Universal Studios, including USA Networks, in exchange for a 45% stake in Diller's company and an option to buy control over the long term.
Diller controls a majority of voting shares in USA Networks and has been trying to build a new type of media company using the companies disparate assets, which include Ticketmaster, a group of second-string television stations and cable channel USA Networks.
Even though Diller votes Universal's shares, sources say Bronfman can veto any deal that would materially alter the structure of the company.